Beyond the purchasing power parity: testing for cointegration and causality between exchange rates, prices, and interest rates

This paper reexamines the causality between the dollar and the yen in a multivariate framework with the aid of cointegration and error-correcting modeling for the 1951–94 period. The Phillips-Perron tests and Johansen's tests are performed. While causality from interest rates to exchange rates is found in the short run, no causality between prices and exchange rates is found in the short run. However, causality is found running from relative prices to exchange rates along with interest rates between the U.S. and Japan in the long run, which supports the long-run PPP hypothesis.     

Nonlinear equilibrium adjustment dynamics and predictability of the term structure of interest rates

We analyze money market dynamics under a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms, derived from a structural model incorporating autocorrelated risk premia, interest rate smoothing and monetary policy feedback. Using a dataset of monthly observations of the spot next and four-, thirteen-, twenty six- and fifty two-week Treasury Bills rates for the United States, Germany and United Kingdom from January 1999 to April 2016, we investigate the power of the expectations hypothesis theory of interest rates taking into account long-run deviations from equilibrium and inherent nonlinearities. We reveal short-run dynamic adjustments for the term structure of the USA, Germany and the UK, which are subject to regime switches. When forecastability is tested during May 2016–October 2017, the MSIH-VECM outperforms systematically the VECM. This is the first attempt to explore the possibility of parameter instability as a crucial factor in deriving the rejection of the restricted version of the cointegration space. Moreover, we investigate the dynamic out-of-sample forecasts of the term structure to assess the effectiveness of nonlinear MS-VECM modeling in capturing the after-effects of the global crisis. Overall, our results suggest that regime shifts in the mean and variance of the term structure may be intertwined with changes in fundamentals, that play a role in driving interest rate regimes, in particular business cycle and inflation fluctuations.     

Modelling conditional heteroscedasticity and jumps in Australian short-term interest rates

The present paper explores a class of jump–diffusion models for the Australian short‐term interest rate. The proposed general model incorporates linear mean‐reverting drift, time‐varying volatility in the form of LEVELS (sensitivity of the volatility to the levels of the short‐rates) and generalized autoregressive conditional heteroscedasticity (GARCH), as well as jumps, to match the salient features of the short‐rate dynamics. Maximum likelihood estimation reveals that pure diffusion models that ignore the jump factor are mis‐specified in the sense that they imply a spuriously high speed of mean‐reversion in the level of short‐rate changes as well as a spuriously high degree of persistence in volatility. Once the jump factor is incorporated, the jump models that can also capture the GARCH‐induced volatility produce reasonable estimates of the speed of mean reversion. The introduction of the jump factor also yields reasonable estimates of the GARCH parameters. Overall, the LEVELS–GARCH–JUMP model fits the data best.     

The relation between stock returns and short-term interest rates

This study examines the relation between the expected returns on common stocks and short-term interest rates. Using a two-factor model of stock returns, we show that the expected returns on common stocks are systematically related to the market risk and the interest-rate risk, which are estimated as the sensitivity of common-stock excess returns to the excess return on the equally weighted market index and to the federal fund premium, respectively. We find that the interest-rate risk for small firms is a significant source of investors' portfolio risk, but is not properly reflected in the single-factor market risk. We also find that the interest-rate risk for large firms is “negative” in the sense that the market risk estimated from the single-factor model overstates the true risk of large firms. An application of the Fama-MacBeth methodology indicates that the interest-rate risk premium as well as the market's risk premium are significant, implying that both the market risk and the interest-rate risk are priced. We show that the interest-rate risk premium explains a significant portion of the difference in expected returns between the top quintile and the bottom quintile of the NYSE and AMEX firms. We also show that the turn-of-the-year seasonal is observed for the interest-rate risk premium; however, the risk premium for the rest of the year is still significant, although small in mangitude.     

Sterilization and interest rates

In this note, the effect of a rise in the foreign interest rate on the home rate is considered in a small economy model with a fixed exchange rate. The cases of sterilization annd non-sterilization are considered. The effect of the degree of substitutability beteen domestic and foreign bonds is outlined.     

Time variation in the relationship between inflation and interest rates

This paper tests the propositions that the real rate of interest was constant from 1953 to 1971 and that Treasury bill yields included an efficient inflationary premium over the same period. Only the former hypothesis is rejected. Comparable results are obtained with both variable parameter regression and piecewise linear regression. Direct estimates of the real rate of interest are reported.     

Economic significance of predictability in Australian equities

This paper examines evidence of predictability in Australian equities using both statistical and economic metrics of significance. A probit‐based predictive model is used to forecast the probability that the 1 month ahead excess market return will be positive. Funds under management are then switched between equities and fixed income on the basis of this forecast. Although the statistical evidence of the model's predictive ability is mixed, the results suggest convincing evidence of an economically significant degree of return predictability. A $A1 investment in the switching strategy (market) in January 1980 grows to over $A55 ($A39) by June 2007. Although the economic significance of the switching strategy remains even in the presence of high transaction costs, robustness checks suggest that the seemingly impressive full‐sample results might be sample specific. The apparent superiority of the portfolio‐switching strategy can be traced to a handful of observations early in the study during which the predictive model provides a timely signal to exit equities. There is little evidence that the predictive model has forecasting ability across the entire sample. As such, this paper serves both to illustrate how alternate metrics of return predictability can lead to divergent conclusions, and to emphasize the importance of subjecting apparent findings of predictability to robustness checks.     

Relationships among exchange rates, intervention, and interest rates: An empirical investigation

This study uses herefore unavailable daily data on official intervention to test the joint hypotheses of perfect asset substitutability and exchange market efficiency. This joint hypothesis is generally soundly rejected for six exchange rates over various sample periods. In contrast to evidence elsewhere from weekly or monthly data, lagged intervention is a significant determinant of realized profits in about half the cases; this evidence is consistent with existence of a portfolio-balance channel, at least in the short-run. Other evidence indicates that coordinated intervention sometimes may have an impact significantly different from intervention by one central bank alone.     

On forecasting interest rates: An efficient markets perspective

Efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. This paper illustrates the closeness of the martingale approximation for two sets of Canadian interest rates data, emphasizing the importance of the forecast interval. The paper then examines three sets of recorded forecasts of Canadian interest rates and finds results consistent with the theoretical discussion.     

An arbitrage model of the term structure of interest rates

A formula for the price of default-free discount bonds of all maturities is found using a Black- Scholes type of arbitrage model which is based on the assumption that a portfolio of three default-free discount bonds of distinct maturities can be managed to be a perfect substitute for any other default-free discount bond. The formula relates the price of bonds to the real rate of interest, the anticipated rate of inflation and the equilibrium prices of interest rate and inflation risks. Bond prices are shown to be the expected value of the sure nominal proceeds of the bond discounted to the present at a random discount rate. It is shown that the unbiased expectations hypothesis is in general inconsistent with this model.     

Nominal interest rates and stationarity

This paper investigates the (break) stationarity null hypothesis using data for 25 interest rates with different maturities and risk characteristics in Canada and the US. In contrast to a large part of the literature, this paper reports strong empirical evidence in favour of the null hypothesis of stationarity for the interest rate series.     

Economic news,exchange rates and interest rates

The paper examines the post-October 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen US macroeconomic series. Markets respond primarily to monetary news, but also to news about the trade deficit, domestic inflation, and variables that reflect the state of the business cycle. For all fifteen macroeconomic variables, an increase (decrease) in interest rates is accompanied by an appreciation (depreciation) of the dollar, which is consistent with models that stress price rigidity and absence of purchasing power parity.     

当前经济形势与互换利率走势判断

2010年上半年,利率互换市场交投活跃。随着市场对经济增长和政策运用预期的不断修正,互换利率继1月创出新高后一路振荡下行。预计下半年,在基本面、政策面、资金面和利率自身波动节奏的相互作用下,市场参与者的预期将反复进行修正,互换利率将呈现宽幅震荡。     

Monetary policy and long-term interest rates: An efficient markets approach

This paper is an application of efficient markets theory to analyze empirically the relationship of money supply growth and long-term interest rates. This approach has the advantage over calier research on this subject in that it imposes a theoretical structure on this relationship that flows easier interpretation of the empirical results as well as more powerful statistical tests on the interest of ascertaining the robustness of the results, many different empirical tests are carried out in this paper, and they uniformly do not support the preposition that increases in the money supply are correlated with declines in long rates.     

On the correlation of exchange rates and interest rates

This note shows that a negative correlation between the price of foreign currency and nominal interest rates in not necessarily an indication of movements in the real rate of interests. Such a correlation could be consistent with a monetarist model in which the real rate is constant.     

The international transmission of interest rates: A note on causal relationships between short-term external and domestic U.S. dollar returns

This study extends the literature of capital market integration by investigating the relationship between U.S. dollar yield behavior in the domestic and in the external dollar market. Recognizing recent increases in world capital market speed of adjustment, the analysis is based on daily changes in yields. Using Granger causality tests, much of the adjustmemt appears to be contemporaneous if contemporaneous is defined as weekly (as opposed to daily) changes, and the Eurodollar market adjusts more rapidly and more completely to changes in the domestic market than the domestic market adjusts to changes in the Eurodollar market.     

The term structure of euromarket interest rates: An empirical investigation

This paper is an empirical investigation of the predictability and co-movement of risk premia in the term structure of Euromarket interest rates. We present regression results which suggest that risk premia in three Euromarket term structures and on uncovered foreign asset positions move together. We test formally the hypothesis that these risk premia move in proportion to a single latent variable. We are unable to reject this hypothesis. The single latent variable model can be interpreted as in Hansen and Hodrick (1983) and Hodrick and Srivastava (1984) as a specialization of the ICAPM in which assets have constant betas on a single, unobservable benchmark portfolio.     

On interest rates,inflationary expectations and tax rates

This paper provides new evidence on the relationship between inflation and the rate of interest for the United States during the 1953–1984 period. The results indicate that contrary to most previous studies, the Fisher hypothesis is inverted, which means that it is the real rate of interest rather than the nominal rate that moves inversely to the rate of inflation. However, this is the case only during periods of relatively stable inflation rates and moderate regulatory change. Over longer periods when factors are more volatile the inverted Fisher hypothesis is rejected.